Debt Management

Will Too Many Credit Cards Mean A Bad Credit Score?

With the holidays recently passed, it’s a fair guess that you were overrun with offers to sign up for credit cards, whether you’re at the cash register or checking your mail at home. Let’s take a look at two offers that always seem to make an appearance on a regular basis.

  • Clerk: “Hi, Would you like to open a credit card with Best Buy to save 15% today?”
  • Commercial Mail Offer: “Get 30,000 American Airlines Miles by signing up for the Citi AAdvantage Credit Card!”

We’re going to discuss how to make sense of choices like those above. What effect does opening a new credit card have on your credit rating? And what does it mean for your wallet when your credit score sags?

It might come as a shock, but to our mind the most important variable for the next year is your own readiness to take on loans. Below, we’ll go into why.

What is calculated in a FICO score calculation?

FICO uses a credit scoring system, which operates on a spectrum between 300 and 850 points. The exact calculation is not available for public knowledge, but there has been some information made available. This is the set of weighted factors that determine your FICO score:

Factor Weighting
Past Payment History 35%
Credit Utilization 30%
Length of Credit History 15%
Type of Credit Used 10%
Recent Credit Inquiries 10%

FICO focuses more on the recent past than the distant past

While the table above provides the basic picture of what goes into your FICO score, it’s also important to consider that your score is weighted towards your recent history overall, rather than the more distant past. If you’ve been making on-time payments on your credit cards for the last year or so, this can help minimize damage caused by past delinquencies. In the same vein, a pile of credit card payment notices that are a year old or more will do less harm today, but just a couple in recent months can be a big problem.

What is the impact of a new credit card on your credit?

A new credit card benefits your credit utilization since it lowers your total debt in proportion to available credit lines. On the other hand, it can decrease the duration of your credit history and increase your number of new credit inquiries. While it’s not fully clear how much each aspect of this choice will impact your score, its our opinion that this generally points to a small negative effect in the short term, while its long term effects have strong positive potential. In sum, opening a new credit card won’t have too much of an effect at all if you’ve got a score of 800 or more, but if you have a more limited credit history, this could push your score from the mid-range into “poor” and make it harder to obtain credit in the future.

What are the benefits of opening a card account?

Exercise careful judgment in how you use your credit card applications. Each airline mile is typically worth about a penny, so getting 30,000 of them by signing up for a new credit card means about $300 in real dollars. At the same time, the Best Buy 15% discount requires some very distinct math because the 15% savings probably won’t come out to be more than $300 unless you’re spending well over a thousand dollars on electronics.

Turn down all rewards credit cards that don’t offer some kind of immediate reward. The market is flooded with cards, like the Chase Freedom, that pay $100 or more for signing up, so unless you’re going to be getting some kind of incentive it’s not worth applying.

And how about the drawbacks of a lower credit score?

While most conversations about credit center around APRs and interest rates, the loan rate that a good FICO score can make available isn’t the most important thing to consider when thinking about the benefits of good credit. Even more important is how much money you plan on borrowing in the next year or so.

That is to say, if you’re going to be seeking a $45,000 home equity loan in the near future, having a good FICO score will be a much more significant factor than if you’re going to be looking for a $5,000 loan for your car. That’s because getting stuck with a higher interest rate on a smaller loan translates to a difference in interest payments that’s small enough to be negligible.

Input 1: Your FICO score and your interest rate

When seeking out a loan, your loan officer will base your interest rate off of a combination of criteria. A shorter loan duration and putting up collateral, as with a mortgage, can lower your rate. But the factor most within your control is your FICO score.

For instance, take a look at the table below, based on information from LendingClub’s average rates for a 36-month “debt consolidation” loan (note: these are not LendingClub’s actual rates, but our own estimates for illustration purposes only).

Credit Score Fico Score Interest Rate
Awesome 780+ 5.98%
Excellent 750-779 6.36%
Really Good 714-749 9.25%
Good 679-713 12.41%
Average 660-678 16.32%

Input 2: Loan Size

In terms of actual money that you’ll be paying, the most important factor is the amount you’re seeking to borrow. In the next table, you can see how a smaller loan minimizes the overall impact your FICO score has on how much your loan will cost you.

Loan Size Fico Score Interest Payment per Year FICO Score is 30 Points Higher FICO Score is 30 Points  Lower
$5,000 730 $483 Save $155/yr Pay extra $223/yr
$10,000 730 $965 Save $654/yr Pay extra $446/yr
$25,000 730 $2,413 Save $777/yr Pay extra $1,114/yr

Go for that new card if you’re not going to be seeking out any big loans in the near-to-middle future

In our opinion, opening 1-2 credit cards each year won’t have much impact on your credit score over the forthcoming year. In fact, it may raise your long-term credit score if you don’t have a very long credit history and keep the amount of credit you use at a low level.

If your future need for loans ranges from small to nonexistent, you should give some serious thought to the merits of an airline miles card. It’s likely that signing up for this type of card will net you a 30,000 mile reward, which translates to about $300 and thus ultimately cancels out much of the cost that comes from borrowing, according to our calculations. There are many rewards cards that have comparable deals.

But, if there is going to be a larger loan in your future, you should hold off on applying for a card or any other loan for around a year previous. In the context of taking out a loan over $25,000, its quite possible that whatever rewards your potential card offers to incentivize signing up will be outweighed by the increased interest rate that can come with a lower FICO score.

This post comes from the NerdWallet.com team of personal finance bloggers and experts in helping consumers find the best low APR credit cards.

Do you have too many cards?

Book Reviews

Should I Buy This Book? Review: Student Entrepreneurs

Student Entrepreneurs I’m a big believer that you’re not truly financially sound until you control your own income. If someone can get rid of the money you bring in by simply saying “We don’t need you here anymore”, then your financially dependent. So I’m trying to educate myself to not let that happen to me.

Every once in a while I’ll be reviewing Entrepreneur/Business books I’m reading, so I can pass on to you which books to read and which ones not to.

This week it’s Student Entrepreneurs. It’s a book about 14 student entrepreneurs that have won a Global Student Entrepreneur Award. It’s basically a short bio on each student going over their first business and how they got into their current business. Along the way they give you a few pointers for you to succeed. What I got out of the book, but that you should already know, is that creating a successful business is hard work.  That’s pretty much sums up the books.

The Negative

Some of the stories were kinda boring and there were really only a few tips that I could use in my life. The first couple of stories I could have done with out.

The Positive

It is full of success stories, so it is somewhat inspirational. Even though they were few and far between, there were some good tips in there that I’m going to use in the future.

Would I buy It?

I don’t think so. The stories were ok but it just didn’t give me much value.

Buy It

But if you want to give it a whirl since it’s pretty cheap:

Student Entrepreneurs New or Used

I really like this book. The title pretty much sums up the book. It goes over how to save money by

Spend Your Way To Wealth

getting discounts on pretty much everything. It gives tip on:

  • Coupons
  • Negotiating on everything
  • Traveling
  • Buying a house
  • Shopping
  • Buying a car
  • Shopping on the internet

I found it really helpful. My favorite chapter is the last one because it goes over making goals and goes over how saving money takes work.

The negative

The only thing I really found negative was that the author doesn’t believe in budgets, and equates it to dieting. I can see where he’s coming from but I think that budgets are essential to having a solid finance life. But to each there own.

The Positive

Pretty much the whole book is a positive. There are tons of money saving tips for the various things I mentioned before. It does promote buying but it does save over and over that it’s not about buying stuff you don’t need. It’s about buying stuff you would buy anyway and saving money on it.

Would I Buy it?

Absolutely. It’s a great book and I learned a lot from it as far as savings go. I would recommend it for someone who wants to learn how to save money and negotiate prices. If you are having trouble sticking to a budget then his advice on not budgeting might before you. I’d at least try it to see if it works.

Buy It

It has my recommendation.

Spend Your Way to Wealth New

Spend Your Way to Wealth Used

P.S. Some of the links in this post I earn a little bit of money from, in order to pay my bills. But I promise to never to intentionally lead you to a bad company and to never let the money affect my opinion.

Insurance

Will Regular Servicing Keep Your Insurance Premiums Down?

When it comes to owning and maintaining a car in Asia, things can get very expensive very quickly. In highly populated areas like Hong Kong, congestion levels are staggering. At peak times, there are an estimated three hundred vehicles filling up every kilometre of the road. It’s fair to say that the people of Hong Kong are familiar with wall to wall traffic jams on the way to work – on the way back as well. This level of traffic congestion is what makes owning a car in Asia so expensive.

However, there are ways to lower the cost of owning and driving a car. The first is to ditch the vehicle and start taking public transport – the buses, trams and trains in Asia are some of the most reliable in the world. If you’re not yet willing to do anything quite so radical, you could always focus your attention on making your vehicle as safe as possible. Just like in Britain, the condition of a car can greatly affect the insurance premium that you have to pay.

The key to maintaining an optimum vehicle condition is with semi-regular servicing. This does cost drivers more money, but it can make a big difference to their premiums in the future with companies like Direct Asia. Yet, even this isn’t any use if you’re not driving the right kind of vehicle in the first place. A brand new vehicle will attract very high premiums, as will a sports car or a vehicle that is older than ten years. It’s a delicate balancing act between the right kind of car and the wrong kind, between a positive service history and a negative one.

For example, you do want your service history to show that you care for the maintenance of your vehicle. You do want there to be evidence of regular scheduled checks and routine wear and tear repairs. This is bound to positively affect your insurance premiums, because it shows that you are willing to take responsibility for the safety of your vehicle. What you don’t want to do is take your car to be serviced or repaired too often. According to experts at HowStuffWorks.com, it can make your vehicle look as if it needs a lot of focused attention.

If you want to attract low premiums, you are advised to drive a car that is between two and ten years old, say the experts at Confused.com. It won’t be new enough to be considered high risk for superficial damage, but neither will it be old enough to be considered a break down risk. Do take your car for a service twice a year, but avoid running up unnecessary expenses on a vehicle that isn’t really worth the effort or the trouble. If you have a car that keeps breaking down, it could be cheaper in the long run to invest in a much better model.

The influence of your service history will depend on what kind of maintenance your vehicle regularly needs. If it only requires a scheduled tune up or a few superficial repairs, it’s unlikely that your service history will negatively impact your insurance premiums. However, if your car has regular engine, brake or suspension problems – you might find that your premium shoots up very quickly. The simplest way to earn yourself a lower premium is still the best one. As long as you drive safely and considerately, you shouldn’t fall prey to unaffordable running costs.

Insurance

Insurance For Single People

When you have a family, the need for insurance is pretty obvious, and the bill for it all can be a real expense of its own. For single folks, though, it’s easy to think that all insurance is just wasted money. Although that’s true for some coverage (most notably whole life), other forms are just as important for you as for others.

LIFE INSURANCE

If nobody relies on your income, you don’t need to take steps to perpetuate that income once you’re gone. However, it’s good form to have enough coverage to handle the kind of sendoff you asked for in your will. If that’s just donating your body to science, you really don’t need any coverage at all. If you want an old-fashioned wake and a big marker for your memorial, a term life policy can provide the funds at a low cost.

DISABILITY INSURANCE

You don’t need life coverage to handle your expenses when you’re gone, but you still need to eat and pay rent if you’re hurt or seriously ill. Disability insurance does exactly that by replacing your income while you recover. This is the only form of insurance that’s more important for single people than for people with families, since married folks can still rely on a spouse for some income while they’re ill. Inexpensive disability coverage is often available through your employer, or you can shop through a broker to get the most appropriate policy for your needs.

RENTER’S INSURANCE

Single people who have bought a home should carry the same kind of homeowner’s insurance as a married couple with the same property. If you’re still renting, a renter’s insurance policy is designed to provide the same protection against theft and damage that a homeowners policy would. In most cases, this kind of policy – though very inexpensive – is usually unnecessary. If there’s a fire or catastrophe, your landlord’s insurance will cover damage to the building. As for your possessions, a typical apartment or home doesn’t have enough of value to bother insuring. Homeowner’s insurance is important because of the value of the home. The only exception is if you own collections or other items of exceptionally high value, in which case you should insure those items specifically as normal renter’s coverage won’t typically cover them.

AUTO INSURANCE

The law says you should carry auto insurance if you want to drive, and each state mandates a certain minimum level of bodily injury coverage. However, that minimum amount may not be enough to pay for your entire recovery – including lost income – if you are at fault in a serious auto accident. It’s a good idea to increase your bodily injury coverage to an amount that realistically pays out what serious medical care is likely to cost.

Read also: How Do You Prove That A Parent Is Unfit?

Investing

The Will Smith Index: 4 Reasons Why You’re Losing Money By Ignoring It

Celebrities are on pedestals in every industry. You want that dress, that car, that new makeup she’s endorsing, that soda he’s drinking in that funny commercial. It’s the celebrity selling point, the Will Smith Index: if they endorse it, you should invest in it.

The Midas Touch

Midas Touch

Image via Flickr by missmareck

Look at Will Smith. He’s one of the biggest stars in the world. He can’t fail; even when he makes a bad choice, such as making Wild Wild West instead of The Matrix, he keeps people talking. He’s planned his career every step of the way, from creating clean raps to tackling TV to becoming one of the hottest actors ever. His movies routinely gross millions and he is a billionaire. Every A-list actor has something in common with Smith at the moment: whatever they touch turns to gold.

If Will Smith appeared on TV tomorrow endorsing a car that runs on Pepsi, everyone in the world would run out to buy both the car and as many cases of Pepsi as possible. If Angelina Jolie, his female counterpart in terms of talent and top billing, strutted the red carpet wearing mom jeans, women would break their necks to buy a pair—or ten. If a celebrity is popular and pleases the public, they make no wrong choices. Everyone wants what they have.

People Want to Become Celebrities

Regular people long to become like their favorite celebrities. They see fame, riches, the ability to travel anywhere and buy anything. They want that. They see plastic surgeons asking for Angelina’s lips and Scarlet Johansson’s cheekbones. When George Clooney premiered Caesar bangs, guys everywhere asked for the same look.

If Bruce Willis steps up for a brand of beer, the stock goes up. When Drew Barrymore says she loves CoverGirl, stores sell out of their cosmetics. In an effort to become more like their favorite celebrities, the public believes what they’re selling. The trick is this: rather than losing money by buying a celebrity endorsed product in bulk, start investing in that company. If Jennifer Lawrence, the new It-Girl, comes out for Doritos, don’t buy the chips, buy the stock.

Celebrities Inspire Big Emotions

The biggest actors and singers are popular for many reasons, but it mainly comes down to what they inspire. They make people feel things—happiness, sadness, anger, desire. Will Smith makes people happy. Angelina Jolie makes people feel sexy and smoldering. Ryan Gosling makes them feel romanced. Financial investors can and should prey on those emotions, because what do people do when they’re emotional? They buy things. Look for tips from a Fisher Investment Forbes Contributor and it instantly becomes clear: the more emotional a person is, the more likely they are to spend.

Influential Stars Influence the People

The biggest reason to take advantage of the Will Smith Index is because he influences people. Influential celebrities influence their fans. When a celebrity endorses a product, the fans buy. If the star makes it look believable, fans buy even more. Invest in those stocks and you’ll make more too. You’ll have to know how long to stay in before you unload what you have, but take advantage of that sweet spot and the money is yours.

Financial investors and planners need to make the most of star power. Once they do, then in theory, they become star makers themselves.